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Securities Fraud in the #MeToo Era

A recent article published by Vinson & Elkins’ white collar practice group details a decision out of the Southern District of New York that highlights an alternative form of liability for companies and their executives when they get caught up in the #MeToo movement. The article can be found here, and is summarized below.

As detailed in the complaint, in November of 2017, after allegations of sexual misconduct were made against CBS-correspondent Charlie Rose, CBS’s CEO Leslie Moonves expounded on the importance of the #MeToo movement to an audience at Variety magazine’s Innovative Summit.  However, Moonves himself then became caught up in the movement after an article detailing allegations of sexual harassment against him was published in The New Yorker. Soon after, Moonves was fired with cause.

In 2019, a group of purchasers of CBS stock brought suit against CBS, Moonves, and the board of directors, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), arguing that the defendants violated federal securities laws by failing to disclose the risk that CBS would lose Moonves, its star executive, as a result of allegations of sexual harassment. In part, the plaintiffs pointed to Moonves’s statements at the Variety event relating to the importance of the #MeToo movement and how a company’s culture should not tolerate sexual harassment as evidence of materially false and misleading statements that served as violations of the Exchange Act.

The court concluded that Moonves’s statement at the Variety event constituted a potentially false or misleading statement. Acknowledging that the issue was close, the court concluded that a reasonable investor could construe his statement as implying that he was just learning of problems with workplace sexual harassment at CBS and that he had not known of these problems previously, even though, in truth, he was at that time actively seeking to conceal his own past sexual misconduct from CBS and the public. Additionally, the court held that Moonves, because he was knowledgeable of his own prior conduct, was consciously reckless when he made the statement at the Variety event.

Additionally, because the court concluded that Moonves was acting as the agent of CBS when he made his statements, and because his state of mind could be imputed to CBS, the plaintiffs had adequately pleaded a Section 20(a) claim against CBS based on Moonves’s alleged 10(b) violation,

There are no shortage of reasons for companies to address issues of workplace harassment by investigating allegations and holding abusers accountable. The Southern District of New York has shown that liability for these issues can still come from new (and sometimes unexpected) areas of the law. While issues concerning statements made by executives and regarding completed and pending investigations are fact-specific, these statements should be reviewed in the context of the law discussed in the CBS case.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.